Big cotton crop could put premium on storage this fall

• Finding a place to store and efficiently transport cotton bales to waiting ships bound for overseas ports may not be as easy this year as it has been in recent years and likely not as economical for growers and ginners.

Chances are good there will be plenty of cotton in the Upper Southeast this year. With a record crop planted and only a few timely showers needed to finish the crop, cotton could be more than plentiful in the region.

Ginners across the Upper Southeast say they are ready for the increased volume and proud to have the extra business. Growers and ginners are two steps in the cotton chain that will eventually take most of the big cotton crop to a foreign textile mill.

Finding a place to store and efficiently transport cotton bales to waiting ships bound for overseas ports may not be as easy this year as it has been in recent years and likely not as economical for growers and ginners.

A hallmark of U.S. cotton is that it is high quality when it arrives at foreign mills and it arrives on time and in the quantity desired by the foreign buyer. Clearly, keeping foreign buyers, or end-users, happy is critical to long-term profitability of the U.S. cotton industry.

Getting such a big crop, one of the biggest on record in the Upper Southeast, from the field, through the gin, safely stored, sold and delivered to the end-user is going to be a challenge for the 2011 crop.

Over the past few years, the volume of cotton in the Upper Southeast has been on a downward trend. This reduction was in large part due to reduced acreage, but also because of weather-related yield reductions.

Finding a warehouse to store cotton hasn’t been a problem in recent years. Finding a ‘good’ warehouse to store cotton has been a problem from time to time and could be a big problem for the 2011 crop.

For U.S. cotton growers, ginners and buyers, a good cotton warehouse is one that gets cotton in and stored in a timely manner from the gin and gets it out of the warehouse on a truck and to the shipyard when the buyer wants it there.

The same criteria don’t necessarily apply when it comes to owners and investors in cotton warehouses.

Freight fee

When cotton is shipped from a gin to warehouse, there is a freight fee, which is most usually paid by the gin. In years in which there is competition among warehouses for cotton bales, the warehouse sometimes pays some or all of the freight.

There is also a receiving fee also typically paid by the gin. Again, in years in which there is competition for cotton bales, some or all of the receiving fee is often paid by the warehouse.

Needless to say, if Mother Nature provides needed late season rains, there will be plenty of cotton in the Upper Southeast this year. Most, if not all of the freight and receiving fees will be paid by the gin and at least in some part passed along to the grower.

Cotton warehouses are required by law to have at least 4.5 percent of their warehouse inventory available to ship each week. In the Upper Southeast ginners or growers pay from $1 to $5 per bale per month for storage.

From the warehouse owner’s perspective, if he has a 100,000 bale capacity filled on day one at an average cost of $3 per bale per month, keeping those bales on the floor can make him a lot of money.

If he has to ship 4.5 percent per week, he can keep about 80 percent an extra month, making roughly $240,000 more than he would have made had he shipped 100 percent of his inventory in a month.

Warehouse operators say it doesn’t work exactly like that, and rightly so. Most recognize their livelihood relies heavily on keeping overseas buyers happy and delaying cotton shipment isn’t going to make either domestic or foreign buyers happy.

Not being able to trade on its long-standing reputation of providing high quality on a timely basis is likewise a threat to the future success of the entire U.S. cotton industry.

The longer a bale of cotton sits in a warehouse, the more money a warehouse owner makes from that particular bale.

However, if a warehouse gets the reputation of being a ‘bad’ warehouse, buyers are going to look to ‘good’ warehouses to buy their cotton.

In the long-run, making extra money from a bale of cotton could put the warehouse out of business as ginners, growers, and buyers all look for other places to house their cotton.

The cotton buyer, often called the merchant, has a commitment to an end-user. He needs to be able to tell that end-user with confidence precisely when cotton will be delivered to a particular textile plant.

The large quantity of cotton that will be moving through gins in the Upper Southeast this fall concerns ginners, warehouse managers and buyers. A common concern is that cotton will be stored in facilities that don’t have the capability and/or the desire to get cotton out quickly.

Some challenging options

It is likely this fall that cotton buyers will face some challenging options on where to buy cotton and where not to buy cotton. For example, he may call one warehouse on Aug. 1, and ask for 20,000 bales of cotton and be told that cotton can be shipped until Oct. 1.

He may make the same call with the same request to warehouse 2 and be told the 20,000 bales of cotton can be shipped Aug. 21.

The first warehouse may make more money on that particular 20,000 bales of cotton, but whether they will make any money on the next 20,000 bales is uncertain.

For warehouses set up to store, find and move cotton efficiently, getting cotton out the door, even with high volumes of cotton expected this year, won’t be a problem and won’t prevent them from being profitable.

The United States Warehouse Act (USWA) authorizes the Secretary of Agriculture to license warehouse operators who store agricultural products. Warehouse operators that apply must meet the USDA standards established within the USWA and its regulations.

Application is voluntary. Applicants agree to be licensed under the USWA, observe the rules for licensing and pay associated user fees.

A list of USDA approved cotton warehouses can be found on the USDA website by searching ‘U.S. cotton warehouse capacity’.

In general, licensees under the USWA are expected to have (each ofthe following characteristics):

Responsible persons and organizations, with a good business reputation, who:

• Are in the business of public warehousing;

• Have adequate financial resources to operate their business, and

• Have knowledge of and experience in generally accepted warehousing practices for cotton.

Have facilities that:

• Are physically and operationally suitable for the protection of cotton in store;

• Allow for the accurate and efficient weighing, sampling, and inspection of the cotton in store, and

• Are within the control, extending to the immediate surrounding environment, of the warehouse operator.

Have personnel available who:

• Have knowledge and experience in weighing, sampling, and inspection of cotton;

• Are able to assist the FSA warehouse examiner with examinations, and

• Have integrity, good judgment and proven performance.

Finding a good cotton warehouse may not be as critical to the 2011 cotton crop in the Carolinas and Virginia as few timely rain showers, but it will be critical to the long-term growth of the cotton industry in the region.